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What is the value of this six-month American put option

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Reference no: EM132973885

Question - A stock price is currently $15. Over each of the next two three- month periods it is expected to go up by 6% or down by 5%. The risk- free interest rate is 5% per annum with continuous compounding. Suppose this option has a strike price of K dollars, where K equals to the total number of letters in your first and last name. For example, if your name is Warren Buffett, then K=13 Dollars. If that option is an American put, what is the value of this six-month American put option? Would it ever be optimal to exercise it early? Write down the binominal tree to indicate if the early exercise is optimal or not.

Reference no: EM132973885

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